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Good morning. My name is Samara, and I'll be your conference facilitator today. Welcome to Frontera Energy's Second Quarter 2022 Operating and Financial Results Conference Call. [Operator Instructions] I would like to remind you that this conference call is being recorded today, and is also available through audio webcast on the company's website.
Following the speakers' remarks, there will be time for questions. Analysts and investors are reminded that any additional questions can be directed to the company at ir@fronteraenergy.ca. This call contains forward-looking information within the meaning of applicable Canadian securities laws relating to activities, events or developments the company believes or expects will or may occur in the future. Forward-looking information reflects the current expectations, assumptions and beliefs of the company based on information currently available to it. Although the company believes the assumptions are reasonable, forward-looking information is not a guarantee of future performance. Forward-looking information is subject to a number of risks and uncertainties that may cause the actual results of the company to differ materially from those discussed in the forward-looking information. The company's MD&A for the quarter ended June 30, 2022, and the company's annual information form dated March 2, 2022, and other documents it files from time to time with securities regulatory authorities describe the risks, uncertainties, material assumptions and other factors that could influence actual results. Any forward-looking information speaks only as of the date on which it was made, and the company disclaims any intent or obligation to update any forward-looking information, except as required by law. I would now like to turn the call over to Mr. Gabriel de Alba, Chairman of the Board of Frontera Energy. Mr. de Alba, please go ahead.
Yes. Thank you, operator, and thank you, everyone, for joining today's conference call to review Frontera's second quarter 2022 operating and financial results. Joining me on the call are: Orlando Cabrales, Frontera's CEO; and Rene Burgos, Frontera's CFO. Rene was appointed as Frontera's CFO on June the 3rd, 2022. Prior to his appointment as CFO, Rene served as Director of Frontera's Board since 2019. Rene, the Financial Markets executive, with over 20 years of experience in investment management, leverage finance, restructuring and financial advisory expertise across multiple industries and geographies, specifically in Latin America. We are fortunate to have such a qualified candidate in Rene to fill this important executive leadership role. I would like to also emphasize that Rene has already made a very positive impact in the company. Rene's 2 years as a key member of Frontera's Board, including his participation in Frontera's Audit Committee and Compensation and Human Resources Committee, have helped give him key insights into the company and its financial structure, and has already allowed him to seamlessly excel in this critical role. Rene clearly understands the shareholders' perspective, and will continue to work with the Board of Directors and the company to unlock value. Also available to answer questions at the end of the call, we have: Victor Vega, VP Field Development, Reservoir Management and Exploration; Alejandra Bonilla, General Counsel; Ivan Arevalo, VP Operations; and Renata Campagnaro, VP Marketing, Logistics and Business Sustainability. Thank you again, everybody, for joining. Frontera continued to perform ahead of plan, substantially delivering on its financial and operational objectives in the first 6 months of 2022. The company also extended its track record of ESG delivery, and focus on enhancing shareholder returns through the ongoing normal course issuer bid share buyback and the CAD 65 million substantial issuer bid. Subsequent to the quarter, Frontera announced a transaction with CGX, and once the transaction closes, will provide an increase in the company's working interest in the Corentyne block in offshore Guyana, to 68%, and secure funding of up to $130 million for the joint venture's second exploration well, Wei-1, which is anticipated to be spud in October 2022. We are doing this work in one of the most exciting exploration bases in the world. In light of the company's strong operational and financial performance in the first half of this year, and the momentum the company expects to carry onto the second half of the year, Frontera is tightening its 2022 production guidance to between 41,000 to 43,000 barrels per day, and increasing its operating EBITDA guidance to between $675 million to $700 million as a result of an increase in the assumed Brent prices at $100 per barrel. Frontera looks forward to advancing its existing inventory of development and exploration opportunities in the second half of the year. I'll now turn the call to Orlando Cabrales, Frontera's CEO; and our CFO, Rene Burgos, who will share their view on our second quarter results. Please, Orlando.
Thank you, Gabriel, and good morning, everyone, and thank you for taking the time to join us this morning. I'm very, very pleased with Frontera's strong financial and operating results in the second quarter of 2022. Compared to the first quarter of this year, we increased production by 1% to 41,586 BOE per day. We improved our operating netback by 16% to $68.01 per BOE. We increased our net sales realized price by 12% to $90.50 per BOE. We grew our cash provided by operating activities by 114% to $246.6 million. We generated $190.7 million in EBITDA. The last time the company delivered this level of EBITDA was in the fourth quarter of 2015. This is the fourth consecutive quarter of growth in these important metrics. On the production side, we increased natural gas production by 9% to just over 10,000 mcf per day, in line with our ESG objectives, and on August 1st, achieved a daily production record for the CPE-6 block of over 5,300 BOE per day. In Ecuador, we sold our first production in May and June of more than 28,000 net barrels. We continue to focus on reducing costs across our portfolio. Despite inflationary pressures, production costs averaged $12.65 per BOE in the second quarter, down 6% compared to the prior quarter. The decrease in production costs was mainly due to quarter-over-quarter decreases in well services and activity, as well as lower energy prices. Transportation costs averaged $10.84 per BOE in the second quarter, up 11% compared with the prior quarter. The increase in transportation costs was mainly due to additional volumes transported in Ecuador during the second quarter, as well as the initiation of the Bicentenario Pipeline take or pay commitment, and to lower costs during the prior quarter due to nonrecurring savings related to OCENSA take or pay contract. Overall, the company believes it will reduce operating costs in the second half of 2022 due to lower energy costs and plant reduction in well services, activities. The company reiterates its 2022 cost guidance, including production costs of between $11 to $12 per BOE and transportation costs of between $10 to $11 per BOE. On the investment side, we continue to unlock opportunities within our portfolio, with drilling successes during the quarter in Guyana at Kawa-1, and in Ecuador at Yin-1. In Colombia, we began 3 drilling activities related to social and environmental impact studies, in anticipation of upcoming exploration activities at the VIM-22 -- sorry, 20 -- 22, VIM-46 block, Llanos 99, Llanos 119 and CPE-6 blocks in the second half of 2022 and the first half of 2023. And in Guyana, we recently announced a transaction with CGX that increases our working interest in the block and secures up to $130 million in funding for the Wei-1 exploration. As a result, we anticipate increased total capital expenditure for the year, of between $435 million to $495 million. Finally, I would like to highlight that during the second quarter, we released our 2021 sustainability report, which details the achievement of 98% of our 2021 ESG targets, and includes our 2022 ESG goals. Speaking of 2022 objectives, in the second quarter, we neutralized 52% of our total emissions in Colombia. Additionally, the company reduced its CO2 emissions in the second quarter by 31,000 tons of CO2, and 69,160 tons in the first half of 2022. Frontera CO2 decrease in the first half of 2022, is a reduction of approximately 12% of Frontera's total 2021 CO2 emissions. I would now like to turn the call over to Rene Burgos, Frontera's Chief Financial Officer.
Thank you, Orlando. I'm very excited to join Frontera's executive team, and I'm pleased to be here for today's call with all of you. Look forward to connecting with all of you in the near future. Complementing what Gabriel and Orlando said earlier, Frontera continues to deliver on its financial targets and objectives. The company finished the quarter with a strong balance sheet and healthy credit metrics, including low LTM leverage of 0.3x. The company generated over $246 million in cash from operations during the second quarter, benefiting from the very strong oil price environment. During the quarter, the company also continued to strategically deploy capital, investing over $70 million in exploration, production and development facilities in Colombia and Ecuador, funding $41 million in debt service obligations, including our final $20 million payment on the Puerto Bahia [ stake ], returning $20 million to investors via the NCIB program and investing $20 million in our potential transformative exploration opportunity in Guyana, just to name a few of our investments. As of June 30, the company closed with $353 million in cash, including restricted cash, a $30 million increase from the third quarter. Consistent with our commitment to enhance shareholder value, during the quarter, Frontera launched a CAD 65 million substantial issuer bid. Assets closed the SIB preceded by way of a modified Dutch auction procedure with a tender price range from CAD 11 to CAD 13 per share. The SIB expired on August 8. Preliminary results indicate a tender price of CAD 12 per share. Frontera expects to pick up and pay for 5.4 million shares or approximately 5.8% of the total number of Frontera's issued and outstanding shares as of June 30. After the cancellation of the shares taken up and paid, Frontera anticipates that, the remaining shares outstanding will now be 87.2 million shares. Final results of the SIB will be confirmed by press release tomorrow. We also expect to reinitiate our NCIB program today. Before handing over back to Orlando for his closing remarks, I would like to take a minute to touch on certain recent events. On August 8th, the incoming government introduced a new tax reform bill. Several aspects of this new legislation includes proposal impacting the oil sector, such as a high price, export tax on crude oil sales, as well as other adjustments in the tax code. We are currently analyzing the potential impacts of the proposed tax bill on our business, and we'll keep the investors updated on the potential impact from this legislation as it develops. I would now like to turn the call back to Orlando.
Thank you, Rene, for sharing your thoughts. Looking ahead to the second half of the year, Frontera has a healthy balance sheet, a sizable amount of cash on hand, low debt balances, low leverage, and we continue to manage operating costs during the time of rising inflationary pressures. We remain on track to optimize capital efficiency and free cash flow after developing CapEx. And we will maintain a strong capital discipline and a targeted investment approach. With that, I would like to conclude by saying thank you to Gabriel, Rene, for the comments, and thank you, everyone, for attending our call. I will now turn the call back to our operator, who will open the call back for questions. Thank you.
[Operator Instructions] And we'll take our first question from Roman Rossi with Canaccord Genuity.
Congratulations on these good results. So I have a couple of questions. I know that you mentioned that you are still analyzing the impact of the tax reform. But I wanted to ask you, what's the percentage of production that you actually export?
We export 92% of our production.
And regarding the other issue there, it's non-deductability of royalties, right? So, how much of your royalties are paying cash? Because it seems that only those royalties will be impacted on this reform.
Well, no -- I mean as Rene said, we are analyzing the proposal coming from the current government. And I would say that there are -- I mean, a couple of comments on that. The first one is, it is a proposal. It has to go through Congress. So there is going to be a debate within Congress in probably in 2 or 3 months. That is study number one. Number 2, the 2 proposals that may have an impact on the oil industry is -- the first one is what they call the export tax which basically try to captures the upside in the oil prices. And the second one is the nonutility of royalties in the income tax of companies, which has applied in Colombia for a couple of days. So those are the 2 proposals address to put it that way to the oil sector. So we will see. We are analyzing that. We will be, I mean, very on top of the discussions in Congress through our -- I mean, the participation in the different trade associations, in the oil and gas trade associations, in the [ field ] trade association and, we registered ourselves in the country. So through these associations, we will be actively participating in that. And maybe the last comment I would make is that, the oil and gas sector has already what we call in Colombia a high price participation formula in the contracts, not only with AMH but also with Ecopetrol, whereby we pay in cash or in kind, that high price participation formula -- the price in which that formula is trigger -- is around $48, $50, which is the one that the government is proposing. So we have already that. That is already placed in Colombia. So the discussion will be coming, and we will be above with that.
And Roman, perhaps just answer your point directly, if you go to our MD&A, and I'll point you to page, I think it's 6, we break down our PAT cash and PAT in kind. So you get a sense of your question, how much is paying tenders in cash.
And just an additional one. I see that on your updated guidance, you are also increasing the development drilling CapEx. So where are you expecting to deploy this development -- additional CapEx?
That is mainly driven by the [indiscernible] well in Guyana, and also some dividend in CapEx in Colombia which is associated with additional activity in the CPE-6 block. I mean, there have been very good results in the CPE-6 block recently as we disclosed, as we announced it. We have record production in the CPE-6 block. So there is an additional drilling activity in the block.
We'll take our next question from Oriana Covault with Balanz.
First, I wanted to point out, if you could comment more on the production figures for this quarter. They seem to get coming flat with respect to first quarter. So just to understand what drove this? And how should we expect production going forward given this time in production guidance?
I think the only thing I would say, Oriana is, yes, it is up to 1%. So that is good. And I think the message to the market is that we are tightening the range in our production guidance. So that gives you an indication of where we are going in terms of production for the whole year.
And maybe a follow-up with regards to the capital budget. We noticed this increase in development activities and exploration, more precisely in Colombia and Ecuador. So just to confirm, would it be a change to the initially budgeted wells, the 65 development wells? Or are you seeing also some inflationary pressures driving this higher development CapEx?
Certainly, I mean, the inflationary pressures are there. I mean we are not -- I mean we are a part of the market, and we are coming -- experiencing that. As I said, I mean, we have been very disciplined in terms of CapEx, CapEx management as well as our cost base structure. So we are handling that situation, tackling that. So we hope to keep that under control. But certainly, the pressure is there. But the increase -- I mean, just to reiterate what I said earlier is that increase in the development CapEx for Colombia is mainly driven by the additional activity.
And just one final one from my side. We noticed this change in the midterm revenue, and it certainly was an impact with respect to last quarter. So perhaps if you could comment a bit more what should we expect in midstream revenues for the upcoming quarters?
Your question is revenues related to the midstream?
Yes, because we noticed a significant decrease. Like it was compensated with higher intercompany, but just to understand what drove -- and I understand there are some changes going on in the midstream segment. So if you could clarify how should we expect this to -- going forward.
Yes. So I was going to highlight. The main difference from this year to prior years, particularly in midstream was from there because of -- the financing had a take or pay contract. That take or pay has now lapped. And I think the numbers you're seeing now, particularly related to the port are a more traditional cross standard port operation for an ongoing business. We should expect the increase in revenues as the board continues to operate. As you know, the port that we have in Puerto Bahia is the largest handler of cargo. We're focusing on expanding our capability from the drive port and also increasing volumes related to the liquid port as we've discussed in earlier calls. But the -- I would say that the numbers now are driven mainly by a debt reduction in activity related to take or pay contractors.
That is correct, Rene. I mean that is basically the delegation of the take or pay contract at Frontera and Puerto Bahia. But just to highlight what Rene said, is that we are taking, I mean several actions or initiatives to make the Puerto Bahia business a self-sustaining business going forward. So there are I mean some initiatives, very important strategic initiatives going on to make that self-sustained. So nothing to report at this point in time, but we are looking at that.
[Operator Instructions] We'll take our next question from [ Matias Lesnick ] with Fundamental.
I would like to ask about 2 topics. The first one is about the increase in the CapEx guidance. I just -- I want to understand whether the -- what's an increase in development drilling, because it's showing a 25% increase, and you're saying that it's because of some increase in drilling activity, but how many new wells are you planning with this CapEx number? And how much of that increases inflation?
I would say, Mathias, and Rene can complement here is, as I said before, the addition in the growing CapEx is mainly driven by that additional CPE-6. We are drilling 5 additional well CPE-6. And in terms of the inflation, inflationary pressure that you mentioned, we are keeping the same risks that we have before in our operations. So that has mitigated the impact of higher rates in the market that you can see today. So the continuation of the campaign with the same rigs has helped us to navigate through these inflationary pressures.
How are you seeing the CapEx inflation for the next year?
CapEx inflation for next year, look, I think that this is -- it's a very timely question. Right now, we are committing with our suppliers and have a structural discussions about how to, one, minimize overall cost and also optimize the logistics that we're looking to put in place. So I think it's -- we do that through master service agreements, spend by rigs just so that we can also mitigate any cost. I mean, we're a player in the market. As to -- we are seeing some pricing pressure for next year. I think it's too early to tell. And we will communicate or update you guys on guidance, on cost. But what I would say is that, to this year, we're reiterating our CapEx in -- sorry, updating our CapEx guidance and reiterating our cost, operating cost and transportation at the levels that we have tried.
And I would highlight Rene that this year, we are starting earlier than other years our planning process for the following year. So -- and the rationale for doing that is exactly that I mean we try to mitigate the impact of the inflation that we are seeing in the market.
Orlando, Rene, I would like to emphasize that indeed management has presented well ahead of plan, and the Board is working already and have provided approvals to management so that we can already schedule and contract what will be CapEx for next year. Therefore, we are limiting potential increases by acting early.
Exactly. That is correct, Gabriel.
And just one last question on my side. How many shares are remaining to be brought under the NCIB program?
How many shares are remaining -- I have actually have them...
You said, yes, we have the number, 10% of the total.
It's total, but we already bought a -- I don't know -- Gabriel, if you're underlying -- if you can answer that question, because I know you have the breakup or your head.
We repurchased about 2 million shares. We have about 3 million, a little bit less available to us under the NCIB. And yes, that will be only on NCIB. Certainly, as the Board and management look at the cash, we can also consider other alternatives.
[Operator Instructions] And it appears there are no additional questions at this time.
Okay. Thank you. Thank you, operator, and thank you for attending the call.
Thank you.
And this concludes today's call. Thank you for your participation. You may now disconnect.